By: Jim Frey, Senior Vice President – Business Development Officer at Gulf Coast Small Business Lending
Using an SBA loan to start-up a franchise location
For many aspiring entrepreneurs, a start-up franchise is an excellent option for launching their dreams of small business ownership. Starting a franchise offers significant advantages over an independent business, especially for first-time entrepreneurs. With a franchise, you’re not starting from scratch—instead, you’re buying into a proven business model with established branding, tested systems, vendor relationships, and often national marketing support. Some refer to those benefits collectively as “enterprise value”. Franchises can help you get up and running more quickly because they provide an existing system and platform; which typically includes such items as menus, pricing, software, and/or layout, and support with training on operations and customer service. As you can imagine, this dramatically reduces the learning curve and the risk of costly trial-and-error mistakes that can sink independent start-ups in their first year.
Additional benefits of using an SBA loan to start-up a franchise location
Franchises also can provide immediate credibility with customers and lenders. Banks are generally more comfortable financing franchises—especially SBA lenders—because they can evaluate past performance across multiple locations, and all parties can research and better understand franchises through standardized and comprehensive Franchise Disclosure Documents (FDDs). Compared to a brand-new independent concept with no market history, a franchise gives you a head start. In short, while you may pay fees for the franchise rights, you’re also buying a blueprint that’s often more likely to succeed.
Getting started with the SBA loan process
There are a number of ways to finance this type of start-up. An entrepreneur can use cash, savings, home equity line, personal loans, and take a loan against, or withdraw funds from retirement (sometimes using a combination of more than one of these options). Often when someone uses retirement funds, there is a penalty or even tax implications, so some might want to consider a Rollover as Business Start-ups, a/k/a “ROBS”, which allows individuals to use their retirement savings to fund a new business without incurring taxes or penalties.
Qualification for and typical terms of an SBA loan for franchise start-up deals
The SBA 7(a) program is a great option because it provides a 10-year loan, with no prepayment penalty, and a borrower can get up to 90% financing. This provides for a longer amortization and a single loan that can roll real estate, construction, soft costs, and working capital into one package. These SBA loans are partially guaranteed by the U.S. Small Business Administration and issued by participating lenders and banks such as Gulf Coast Small Business Lending. To qualify for an SBA loan the borrower will need to meet specific lending criteria and the franchise must also be included in the SBA Franchise Directory. If you are interested in the option, you should reach out to our team of experienced SBA professionals (https://gulfcoastsba.com/our-people/) to discuss the details and get guidance on franchise finance, loan structuring, and eligibility requirements.
Often start-up franchises are going to require around 20% equity injection (think of this as a cash down payment) from the borrower, and the bank will provide an SBA loan covering approximately 80% of the total project costs. Note that the maximum SBA 7(a) loan is $5,000,000.
Items you will need in order to apply for an SBA loan
To consider the SBA loan, lenders will ask for many documents, including a business plan with 24-month projections and break-even analysis, a personal financial statement, three years of tax returns, a resume from an experienced operating partner, and also a letter of intent or lease, build-out budget, equipment quotes, and a working-capital schedule. Note that often the franchisor can help with a model for pro formas which might speed up underwriting because seasoned franchise lenders already have a level of comfort with the assumptions.
When it comes to projections we recommend taking a middle-of-the-road approach. Sometimes a borrower will try to find the worst-case scenario and provide that set of projections to the SBA lender while other borrowers provide lenders with overly aggressive projections. Quite frankly, neither works well. Lenders much prefer realistic or moderate projections that can be supported with well documented and well considered assumptions.
Finding the right SBA lender for your franchise start-up project
While not all banks are comfortable with start-up franchise loans, many have a niche specialization with franchise lending. Borrowers should always confirm that their lender of choice is both an SBA Preferred Lender and that they have recently financed other franchise start-ups, preferably with the chosen brand. A great question to ask would be “How many units of this brand did you finance last year?” Many banks get comfortable with a franchise brand and the process becomes streamlined, and much of the underwriting is standardized, making a faster process. SBA lenders that specialize in this type of lending also roll interest-only payments through construction so you are not servicing debt before opening, and many times they can coordinate with the franchisor’s field team when delays pop up.
The loan process and information to collect before applying for an SBA loan for your franchise start-up
Some of the biggest challenges in securing SBA financing for a franchise start-up include a poor credit score (typically under 680), too little equity/liquidity, construction/building permit delays, finding a good location that suits both the borrower and franchisor, and getting accurate projections.
In summary, the following steps are a roadmap for an SBA 7(a) loan for a start-up franchise:
- Verify the franchise is on the SBA Franchise Directory, review the FDD;
- Draft a business plan, projections, collect the documents required by the SBA, talk with an SBA lender;
- The lender will review the project with you, and if it is a fit, they will underwrite the loan, write a credit memo, and ideally get the loan request approved;
- The borrower finalizes the construction budget and plans, finalizes the lease, and gets the building permits;
- The initial loan funding occurs, there is a construction draw period over months (interest only), then once construction is completed, there is a final inspection and final funding;
- Grand opening, business moves full speed ahead, the SBA loan switches to fully amortizing payments.
Summary
Starting a franchise can be a smarter and less risky path to business ownership than launching an independent start-up, especially for first-time entrepreneurs. Franchises offer proven business models, brand recognition, established systems, and lender credibility—factors that reduce the learning curve and increase chances of success. There are many financing options. Choosing a lender experienced with start-up franchises—ideally familiar with the chosen brand—can streamline the process and avoid delays. Challenges may include low credit, limited equity, and construction setbacks, but with the right preparation and team, start-up franchise owners can launch with confidence and momentum.
Gulf Coast Small Business Lending has an experienced and dedicated team, Gulf Coast Franchise Finance, which specializes in franchise lending nationwide. You can find more information here: www.gulfcoastfranchisefinance.com or you can reach out to our experienced SBA professionals here: https://gulfcoastsba.com/our-people/. Gulf Coast Small Business Lending is a nationwide SBA Preferred Lender.
About Jim Frey
Jim Frey has over 21 years of financial services experience, including an exclusive focus on SBA lending since 2012. Jim enjoys working with many referral sources across the US and he takes particular satisfaction in helping business owners reach their goals through SBA financing. Over the years, Jim has developed a specific expertise in structuring SBA loans for business acquisitions, franchise lending, expansions and construction. Jim has a Master of Business Administration from the University of Pittsburgh’s Katz Graduate School of Business and a B.S. in Finance from St. Vincent College. When not working on deals, Jim’s hobbies include hiking, volunteering, golfing, and traveling with his wife and two daughters.